Euro slumps as Cyprus races to meet deadline

S&P cuts credit rating on Cyprus further into junk range

V.Phani Kumar

LOS ANGELES (MarketWatch) — The euro fell Thursday, trading at fourth-month lows against the U.S. dollar as debt-troubled Cyprus worked to meet a bailout-related deadline, and as a purchasing-managers’ index pointed to a deepening economic downturn in the euro zone.

The euro
EURUSD, -0.0339%
settled around $1.2897, down from $1.2933 in North American trade on Wednesday and from its early high of $1.2956.

An antibailout rally outside the parliament in Nicosia in Cyprus on Tuesday.

Late into Thursday’s session, Central Bank of Cyprus Gov. Panicos Demetriades unveiled a proposal to consolidate the country’s banking sector and to ensure that the country’s second-largest lender would avoid bankruptcy, according to media reports.

Euro-zone finance ministers said late Thursday said they were ready to talk about the new proposal from Cyprus as soon as they received it.

Cyprus is trying to raise around 5.8 billion euros ($7.5 billion) in return for a €10 billion rescue package from its European partners. Cyprus officials had been working on a plan to tap pension funds and other assets and were still in talks with Russian officials about possible aid.

Separately, Standard & Poor’s late Thursday cut its credit rating on the Mediterreanean island nation one notch further into junk territory, to CCC from CCC+ with a negative outlook.

In addition to uncertainty about Cyprus, the euro was pressured by evidence that the euro zone’s economic downturn worsened this month. French and German purchasing-managers’ index, or PMI readings, dragged the region’s composite PMI further into contraction territory. See: Euro-zone PMI signals deeper March downturn.

“The clear message from the latest batch of PMI readings is that the euro-area economy suffered a sixth consecutive quarter of falling GDP” in the first quarter, said James Ashley, senior economist at RBC Capital Markets in London.

So far, however, the euro has managed to hold chart support at $1.2850, said Boris Schlossberg, managing director of FX strategy at BK Asset Management in New York.

“It appears that the currency markets continue to hope for some sort of definitive resolution of Cyprus banking crisis, but with time running out under ECB’s self-imposed timeline, the downward pressure on the pair is likely to increase as we head into the weekend and the 1.2850 support line may tested if traders begin to believe that no solution is coming,” he said.

In a seesaw session, the ICE dollar index
DXY, +0.38%
a measure of the greenback against six major global currencies including the euro, rose to 82.833 from 82.852 late Wednesday.

Economic data from the U.S. were also released Thursday, with the Philadelphia Federal Reserve saying manufacturing activity in the region picked up sharply in March, while the Conference Board’s leading economic index grew 0.5% in February, a third straight month of gains.

The WSJ dollar index
BUXX, +0.03%
a rival gauge of the greenback’s performance against a slightly wider basket of currencies, was firmly lower, at 73.50 from its close Wednesday at 73.71.

The U.S. dollar
USDJPY, +0.02%
weakened against the Japanese yen, buying ¥94.94 compared with Wednesday’s level of ¥96.03.

In his first news conference, new Bank of Japan Gov. Haruhiko Kuroda was quoted as telling reporters that more efforts were needed to counteract deflation pressures.

Earlier Thursday, Kuroda pledged “all-out efforts” to drive Japan out of an era of deflation, according to an AFP report.

The Australian dollar
AUDUSD, -0.0254%
meantime, rose to $1.0437 from $1.0378 on a day of high political drama in the country.

Prime Minister Julia Gillard on Thursday was re-elected leader of the ruling Australian Labor Party. She had run unopposed. She had called a vote earlier in the day, after Arts Minister Simon Crean was sacked for publicly urging Gillard for a change of all leadership positions. Read full story on Gillard’s re-election.

Among other major pairs, the British pound
GBPUSD, -0.0371%
rose to $1.5167 versus $1.5102 on Wednesday.

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